How Macroprudential Financial Regulation Can Save Neoliberalism

Abstract

This article

• Examines the global financial crisis through the larger lens of the optimal models of growth for the Anglo-American political economies.
• Offers a concise yet thorough synthesis of two major explanations—the debt-driven growth hypothesis and the financial instability hypothesis—of the global financial crisis.
• Analyzes substantial empirical evidence for both hypotheses, calling into question the utility of the widely cited debt-driven growth hypothesis.
• Offers a novel interpretation of how the financial instability hypothesis can in fact be interpreted as showing the potential for stabilizing the neoliberal model of growth through macroprudential financial regulation.
• Outlines the major elements and institutions of macroprudential regulation and examines both the potential and pitfalls of this approach.

For many, the 2008 global financial crisis (GFC) signaled the end of neoliberalism. This article argues that the crash was less the exhaustion of the free market model as a problem of excessive credit. Focusing on Anglo-American economies, this article explores two competing hypotheses—debt-driven growth and financial instability. The rationale and empirical evidence for both are reviewed, showing that the financial instability hypothesis, with its emphasis on financial (credit) cycles, offers the more compelling explanation. The main flaw of the neoliberal growth model is a tendency for excessive credit growth, producing crashes that wipe out gains in the real economy. The solution is macroprudential financial regulations—broad controls on financial markets to smooth the credit cycle. Implementing macroprudential financial controls could ‘save’ neoliberalism by securing its more robust output while limiting the disruptive financial shocks that serve to undercut that dynamism.